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Sofia, Bulgaria, March 9, 2000
Mr. Stanley Fischer
Dear Mr. Fischer:
In 1999, the Government of Bulgaria continued to implement stabilization and reform policies successfully under the three-year economic program supported by the extended arrangement. Reflecting our strong efforts, all end-December 1999 performance criteria were observed, and recent macroeconomic developments have been quite favorable. Despite adverse circumstances, including the Kosovo crisis, GDP grew by 2.5 percent last year, and the external current account deficit was limited to about 5 percent of GDP. Both outcomes were better than expected just a few months ago.
To consolidate the recent gains, we are determined to stay on course. The attached Memorandum on Economic Policies of the Government of Bulgaria describes the progress made and measures that we will implement during 2000 to help achieve our main goals of sustained high growth and a rapid transition to a fully competitive market economy.
The Government of Bulgaria believes that the policies described in the Memorandum are adequate to achieve the objectives of its economic program, but stands ready to take additional measures as necessary to keep the program on track. The government will remain in close consultation with the IMF in accordance with the Fund's policies on such consultations.
Attachment: Memorandum on Economic Policies of the Government of Bulgaria
OF THE GOVERNMENT OF BULGARIA
1. In 1999, our economy faced major challenges. The effects of the global financial crises in 1998 continued to be felt through weak external demand for Bulgarian goods and low export prices for our key commodities. In addition, the war in Kosovo blocked our main trade routes and reduced investor confidence in the region. These external shocks coincided with the most intensive phase of our enterprise privatization and restructuring program, causing unavoidable disruptions in production as unviable enterprises were being phased out.
2. In response to these challenges, we continued to carry out sound economic policies. These policies were underpinned by the currency board arrangement to which we remain fully committed. Fiscal policy was prudent as we limited the general government budget deficit to 214 million leva (0.9 percent of GDP), and incomes policy for state-owned enterprises was implemented strictly. At the same time, we continued structural reforms on a wide front. We accelerated privatization, recording the highest level of sale of state assets in Bulgaria's history, and brought the isolation program for commercial enterprises to a successful conclusion. We initiated sweeping reforms in the energy and transportation sectors, including the restructuring of large state monopolies. We continued to strengthen the financial sector by selling state banks to strategic investors and by further improving banking supervision.
3. The macroeconomic outcomes in 1999 testify that we met the challenges posed by the severe shocks successfully. While the shocks kept economy activity subdued in the first half of 1999, output rebounded strongly in the third quarter, and GDP growth for the year is now estimated at 2.5 percent. Toward the end of the year, higher food and energy prices raised inflation from earlier exceptionally low levels, but inflation during the year at 6.2 percent remained moderate. The external current account deficit widened markedly in the first half of 1999, but was contained to an estimated 5.2 percent of GDP for the full year as exports started to recover after midyear. Confidence in the lev remained strong, with gross official reserves at US$3.2 billion and the fiscal reserve account at US$1.4 billion at end-1999.
4. Firmly committed to maintaining macroeconomic stability and advancing reforms, we will continue to conduct economic policies in the framework of our three-year adjustment and reform program (July 1998-June 2001) which the IMF supports under the extended arrangement. The remainder of this memorandum sets out in detail our macroeconomic and structural objectives and policies for the period ahead.
5. Our main medium-term goal remains to achieve annual GDP growth of at least 4-5 percent while maintaining a stable macroeconomic environment and making our market economy fully competitive. Pursuing this goal will help to raise living standards and reduce unemployment and poverty, and it is consistent with our aim to join the EU which in late 1999 invited us to start membership negotiations. For 2000, we believe the specific objectives set at the time of the second program review last summer are achievable, and have updated them only marginally (see tabulation below). Hence, we aim at GDP growth of 4 percent, with moderate inflation, an improvement in the current account position, and comfortable fiscal and foreign exchange reserves.
6. To achieve the objectives for 2000, we are determined to continue our prudent fiscal and incomes policies and maintain the momentum of structural reform. We believe that strict implementation of our 2000 budget and tight control over wages in state-owned enterprises will support the currency board arrangement and preserve competitiveness, while structural reform will increase the economy's market orientation and lay the foundation for rapid growth. The focus in the structural area will be on completing the enterprise privatization program, imposing hard budget constraints on state enterprises, implementing major institutional reforms (including the overhaul of the health and pension systems and the establishment of a unified revenue agency and a treasury), strengthening the financial sector (including through further bank privatizations), and improving Bulgaria's business and investment climate (including through cutting red tape and corruption). The subsequent sections of this memorandum provide an outline of the initiatives in the various areas, while Tables 1 and 2 contain the specific measures and their intended timing.
7. Prudent fiscal policy remains the linchpin of our strategy to support the currency board arrangement. In 1999, an overall strong revenue performance and cautious expenditure management enabled us to limit the general government deficit to 0.9 percent of GDP, well below the originally budgeted 2.8 percent of GDP. This tighter-than-envisaged fiscal stance was instrumental in containing the effects of the various shocks on the external current account. In 2000, we aim to maintain a broadly unchanged fiscal stance. We will limit the general government deficit to no higher than 1½ percent of GDP, with the primary surplus at 3¼ percent of GDP, compared with 3 percent last year.
8. While we believe that the envisaged fiscal stance is consistent with the macroeconomic framework for 2000, we are prepared to tighten fiscal policy during the year if the external current account deficit does not improve as expected. Conversely, if the current account position improves more than projected and revenues exceed targeted levels, there could be room for some acceleration of public investment and supporting civil service reform through decompression in the wage structure in the second half of the year. To ensure that the targeted deficit is not exceeded and to facilitate a tightening if needed, the 2000 budget law maintains the provision allowing the Ministry of Finance to limit discretionary expenditures to 90 percent of the budgetary allocation. The budget also includes expenditure contingencies of 1¼ percent of GDP, mainly to cover the transitional costs of structural reform. Owing to the inherent uncertainties in forecasting expenditures in the first year of major reforms, a contingency amounting to 0.8 percent of GDP has been allocated for possible activation in the health and pension sectors. These funds will not be used to finance an increase in entitlements above those already established for 2000, and we will use these funds only after consultation with Fund staff. Another ¼ percent of GDP is reserved for one-time operations that ensure a final resolution for enterprises to be privatized, liquidated, or restructured.
9. In 2000, we aim at a strengthened fiscal performance in the municipalities and the National Social Security Institute (NSSI). In 1999, within the prudent general government stance there were marked differences among the branches of government. While the central government achieved a small surplus, the performance of the NSSI was somewhat weaker than expected, and municipalities ran sizable deficits. This year, we expect improvements in enforcement and the information exchange between tax administration and the NSSI to help enhance the collection capacity of both agencies. As for the municipalities, we have introduced new provisions in the 2000 budget law which should ensure improved expenditure discipline in the local government sector. These provisions include limiting expenditure to the level of revenues collected (rather than projected), and linking transfers from the central government to fiscal performance, with penalties for deviations.
10. We aim to collect general government revenues equivalent to over 36½ percent of GDP despite making moderate cuts in personal and corporate income taxes. The tax changes, which took effect from January 1, 2000, included a reduction in the higher marginal rate of the corporate income tax from 27 to 25 percent, an increase in the minimum threshold for taxable monthly income under the personal income tax from 75 to 80 leva, and a corresponding rise in the floors of all other tax brackets. We estimate the combined revenue loss from the cuts in the corporate and personal income taxes at 1/3 percent of GDP. These losses should in part be offset by improvements in tax and social security administration, in particular the phased establishment of a unified revenue agency to collect taxes as well as social security and health contributions, a harmonization of the bases for the personal income tax, health, and social security contributions; extending the coverage of the presumptive ("patent") tax; and improving the selectivity of audits. Tax revenue will also be helped by our continued strong efforts to reduce arrears to the budget. In the second half of 1999, we managed to reduce tax arrears (including interest and penalty) by 417 million leva from the end-June level of 759 million leva, reflecting the privatization or restructuring of the state enterprises with the largest overdue obligations. Moreover, during the same period we reduced the overdue obligations to social security and customs by the monitored companies by 17 million from 150 million leva at end-June. In 2000, we propose to widen the performance criterion on arrears to include both taxes and social security contributions, in line with the scope of the unified revenue agency, and are committed to reducing these arrears from the end-1999 level of 512 million leva by 39 million leva in the first quarter of 2000 and by a further 44 million leva in the second quarter, with subceilings for taxes and social security contributions. Overdue obligations to customs will remain subject to indicative targets.
11. Expenditures will be contained to about 38 percent of GDP. To accommodate the transitional costs of the pension reform (from the beginning of 2000) and health reform (effective from mid-2000), spending in these areas has been raised by a total of over ½ percent of GDP. These spending increases have been offset by reductions in staffing and subsidies, the latter consistent with the restructuring plans for state enterprises. The average wage in the budgetary sector will be raised by 7.9 percent during 2000. In the social area, the budget will preserve the real value of social assistance. In addition, effective from February 1, 2000 the minimum wage, which applies to 1 percent of budgetary employees, has been raised from 67 leva (US$35) per month to 75 leva (US$39). From now on, the minimum wage will be raised every six months, starting on October 1, 2000, in line with the increase in the average public sector wage. In expenditure management and control, we will build on the recent steady progress in implementing the treasury, and will by end-2000 concentrate all central government budgetary and extrabudgetary accounts which are not subject to restrictions imposed by foreign donors in a single treasury account. To improve the quality of public investment, in preparing the 2001 budget we will rely on a list of priority projects established in an updated public investment program.
12. We are implementing sweeping institutional reforms to maintain medium-term fiscal viability. Building on the macroeconomic stability achieved, we are now in a position to address long-term fiscal problems. Besides the above-mentioned implementation of the treasury, we are taking steps to establish a unified revenue agency and to ensure the viability of the pension and health systems.
13. We will spare no efforts to put in place a unified revenue agency to administer the collection of taxes and social insurance payments which we expect to enhance revenue collection capacity significantly over time. We recognize the need to reduce tax and social security contribution rates over the medium term, and to adapt revenue administration to an economic environment with a rapidly growing number of private taxpayers. To help achieve these objectives, we will unify the registration, control, collection, audit, and enforcement activities based on modern information technology using the Unique Identification Number. We will implement this reform in a phased manner, building on progress made in individual agencies and ensuring a stable revenue performance. Throughout the process, we will retain the National Social Security Institute and the Health Insurance Fund as independent agencies, and will ensure that revenues for social insurance will continue to be separately identified and transparently channeled to these agencies. Key measures in the coming months include the setting up of a high-level interministerial committee and of a strong project management team, the adoption of a strategy paper that develops the vision and implementation plan for the unified revenue agency, and the submission to parliament of draft legislation to further rationalize the bases for tax and social insurance payments. The new agency will be established during 2001, starting unified revenue collection from large taxpayers, and will be fully operational by the end of 2001.
14. We are implementing a radical overhaul of the pension and health systems. While the primary emphasis in pension reform is now on putting the first and third pillars in operation, we will continue our efforts to develop the system, including by (i) strengthening the regulation and supervision of voluntary pension funds by end-March 2000, (ii) reviewing the scope for expanding the investment options of voluntary pension funds by end-June 2000, and (iii) assessing by end-June 2000 the need for remedial action to restore the long-term financial viability of the first pillar in light of the changes to the originally envisaged parameters made by parliament. In addition, we will accelerate the preparatory work for the universal second pillar, which as parliament recently decided will be launched in 2002, two years earlier than originally envisaged. Turning to the health sector, we will complete the re-registration of health care establishments as commercial companies, and define the division of responsibilities among state and municipal institutions and the Health Insurance Fund by end-March, 2000. We will sign a framework agreement with representatives of outpatient health care providers on the functioning of the HIF-financed medical care by April, and will conclude a critical mass of individual contracts with outpatient health care providers to be able to launch the new system for primary and specialized healthcare from July 1, 2000. In parallel, we will begin preparations for the second stage, to be launched from mid-2001, comprising hospital care.
15. We will continue to implement a strict incomes policy for state-owned enterprises. We are committed to keeping the total labor cost of state-owned enterprises under control by restricting their wage bill, while allowing them to choose the level and quality of employment. The incomes policy ordinance for 1999 served well in achieving this objective. In particular, among the enterprises that we monitor most closely, those with large losses or arrears reduced their combined wage bill by 20 percent between the third quarter of 1998 and the fourth quarter of 1999, and monopolies reduced their total wage bill by 4 percent between the second and fourth quarters of last year. The incomes policy ordinance for 2000, which was approved on February 17, maintains the overall objective but includes some improvements, such as removing seasonal factors from the measurement of productivity and profits. At the same time, we have allowed the district heating companies more flexibility in setting their wage bills in line with seasonal demand. Finally, we have formulated an updated list, now comprising 121 enterprises, that during 2000 will be subject to the strictest constraint, namely a wage bill freeze. This list now includes not only monopolies and enterprises with the largest losses and arrears but also enterprises that are subsidized by the government.
16. We will take steps to increase labor market flexibility, with a view to reducing unemployment and maintaining competitiveness. By end-March 2000, we will submit to the Council of Ministers amendments to the Labor Code that will substantially liberalize labor regulations while complying with EU and ILO standards. The amendments will include provisions to make hiring, firing, and working hours more flexible. Moreover, we will continue to implement programs aimed at retraining and encouraging employment, and support the start of small businesses to facilitate the absorption of the unemployed by the private sector. We will also make employment and investment clauses in privatization contracts more flexible.
Enterprise restructuring and privatization
17. After the largest wave of divestiture in Bulgaria's history in 1999, we have now entered the last year of privatization of non-infrastructure assets. By end-1999 we had privatized 77.5 percent of state-owned assets excluding infrastructure and 48.7 percent of the total assets. This year will see the completion of large-scale enterprise privatization, the divestiture of residual shares in enterprises that have been privatized, and further mass privatization. Regarding the large enterprises, there remains an attractive pipeline of major assets ready for sale in 2000, notwithstanding our strong progress in 1999. Owing to the complexity of the deal and the conflict between the financial aspiration of potential acquirers and our desire to open the market for competition, we have not yet been able to complete the sale of a majority package of BTC, the telecommunications company. If negotiations with the current bidder fail, we will quickly reopen the tender with every intention to finish the sale this year. We also intend to sell Bulgartabak (which is already on offer) this year and make progress in preparing assets in the power sector for privatization (see the section on energy sector reform below). As for residual shares, we will by end-June sell or otherwise dispose of these for all enterprises that are not involved in litigation related to the determination of ownership or restitution claims, with a small number of exceptions. Our approach will be eclectic: if the majority shareholder does not wish to purchase the residual shares they will be offered in mass privatization auctions or in the stock exchange. On mass privatization, success has been achieved in disposing of less significant enterprises through this method of ownership transformation. The seventh mass privatization auction, offering shares in 90 enterprises, will be completed in March 2000. Seven more auctions are scheduled for the remainder of 2000.
18. Following the successful completion of the isolation program for Group B (commercial enterprises) in mid-1999, we were determined not to allow the assets or the affected employees to remain in an indefinite state of suspension. We therefore achieved our commitment under the performance criterion to terminate production activities for all Group B enterprises that had been entered into liquidation and disposed of at least half of the assets in more than half of the affected enterprises. In other cases leasing arrangements have been made with private sector concerns which effectively bring the assets under private management. We will continue to press ahead with further asset sales as market conditions allow but aim to finish the process by end-2000.
19. Despite the progress already made, we recognize that liquidation and bankruptcy proceedings need to be accelerated for both private and state enterprises, and are taking steps to streamline these processes. An amendment to the Commercial Code that simplifies and accelerates bankruptcy procedures has passed first reading in parliament, and judges have been receiving training on bankruptcy matters. We will ensure that by end-June 2000, the newly established unit under the Council of Ministers will be fully operational, setting requirements for the selection, removal, and supervision of liquidators for state-owned enterprises and subsequently enforce these requirements. Moreover, by end-June 2000 we will establish a commission including experts from outside the government to review practices in this area, and to evaluate the need for further possible amendments. Also by mid-2000, we will create a body within the Ministry of Justice to supervise receivers.
20. With the exception of national railways, BDZ, the state enterprises remaining in isolation (Group A) are utilities in the energy sector. Our determined strategy is to make all these enterprises commercially viable through the use of cost reductions, selective investments in new infrastructure, and adjustments in tariffs. We will not hesitate to liquidate those enterprises which clearly are not viable in the long run. In the second half of 1999 Group A enterprises were already subjected to wage bill freezes, and they submitted restructuring plans aimed at enabling them to live within the reduced subsidies provided in the 2000 budget. The restructuring of the energy companies is described in the next section. As for BDZ, important progress has been made in rehabilitating the company in accordance with its financial recovery program approved last November. In 2000, the company will take measures sufficient to reduce its losses from 151 million leva (excluding a state subsidy of 60 million leva) in 1999 to 98 million leva (excluding a subsidy of 40 million leva) while fully repaying its arrears to the state which totaled 49 million leva at the end of last year. Losses are concentrated on the passenger side, where a new timetable was introduced with effect from January 15. We anticipate this will result in a decline in terms of train kilometers of almost 25 percent and cost savings in excess of 13 million leva. We also intend to introduce pre-paid cards that will limit the number of subsidized trips that individuals may make and improve the company's cash flow. Moreover, we will work with the Ministry of Labor and Social Policy to analyze ways to improve the targeting of transport subsidies.
Energy sector reform
21. We will strengthen the independent regulatory commission to ensure a well-functioning market in energy. This commission was established in September 1999, but has yet to become fully operational. By end-March 2000, we will clearly define the commission's functions and the mechanism of financing its operations, provide budgetary resources to enable it to discharge its core functions until a new, permanent financing mechanism is in place, and seek a twinning arrangement with an experienced regulatory agency in western Europe. During 2000, the commission's top priority is to put in place the regulatory prerequisites for implementing the legal separation of NEK, the electricity company. These include ordinances on the pricing system and the general conditions for draft contracts for the purchase and sale of power. These ordinances are expected to be adopted in April 2000. The commission will also develop pricing mechanisms for the district heating and gas sectors, and implement the permit and licensing regime which will be the key source of its funding over the medium term.
22. Building on steady progress made to date, including accounting separation a year ago, we have put in place all the technological prerequisites for the legal separation of NEK into the generation, transmission, and distribution components. However, to ensure a smooth and transparent transition to a regulated competitive market we regard the adoption of key pieces of secondary legislation related to the Energy Law as a necessary condition for the legal separation. Also, the regulatory commission and the State Agency of Energy will by April 15, 2000 agree with the World Bank on an effective mechanism to monitor the price setting policies through which transfer prices between generators, the Single Buyer (the electricity transmission and dispatch company) and distribution companies are to be determined until the price regulation ordinance takes effect (no later than mid-2001). We will only proceed with NEK's legal separation when the core regulatory framework has become effective and the agreed price monitoring mechanism is in place.
23. We are committed to the continued restructuring of Bulgargaz, the natural gas monopoly. The financial recovery and restructuring program introduced in mid-1999 and further specified in September has produced promising initial results. Collection under the rescheduling program concluded with major customers last year has been 99 percent, and we intend to continue to enforce the terms of the contracted agreements. Having been the company with the largest arrears in mid-1999, Bulgargaz has since eliminated all its overdue obligations and fully met its current obligations to the budget. In December 1999, an international accounting firm completed an audit of the company's 1998 accounts, and the accounting separation of its transmission, import, distribution, transit, and storage activities was achieved. Looking forward, Bulgargaz will continue to implement its restructuring plan on schedule. Agreed purchase volumes for 2000 from the single supplier of gas are based on Bulgaria's anticipated consumption, and we expect to significantly increase our role as a transit route for gas to neighboring countries, in line with the long-term agreement with the gas supplier. We will also ensure that Bulgargaz completes a full inventory of its physical assets by end-March 2000 to prepare the company for eventual legal separation.
24. We are determined to take strong measures to address the financial problems of the district heating companies (DHCs) both in the short and long runs. In view of the recent weak financial results of the DHCs resulting from higher fuel prices, increased disconnection rates, and a marked decline in collection rates, we will take a number of actions immediately to prevent a build-up of payments arrears. First, taking into account the seasonal nature of the DHCs' operations, we will frontload the release of budgetary subsidies to DHCs. Second, through a similar early release of budgetary transfers not exceeding those already planned in the budget, we will enable budgetary organizations and municipalities to settle their arrears with the DHCs. In the case of Sofia DHC, which accounts for well over half of the district heating system and which is the only DHC owned by a municipality, we will request the municipality to cover part of the higher-than-expected losses. We will also subject DHCs to tight cost discipline to bring them in compliance with the existing rehabilitation plans. Here, measures will include the sale of non-core assets and strict observance of existing wage ceilings. Simultaneously, we will develop a comprehensive Action Plan in coordination with the World Bank to address the long-term problems of DHCs, including the Sofia DHC. This Action Plan will be based on an assessment of the government's objectives regarding DHC pricing, subsidies, and investment, and will be coordinated with the government's overall energy policy and public investment program. Specifically, the Plan will draw on an analysis of the financial, environmental, and social impact of alternative options for each individual DHC and the district heating system as a whole; identify which DHCs should continue to operate; and include restructuring and investment plans for the cases where maintaining a DHC is considered to be the most efficient option, with a declining path for operating subsidies. The Action Plan will be submitted to the Council of Ministers by end-May and approved by it by end-June.
25. The coalmining sector has also undergone substantial restructuring, with further progress to come. Nine unviable pits (sections of coalmines) have already been closed down, and all legal obstacles to privatizing viable coalmines has been eliminated from January 1, 2000. Looking forward, by end-March 2000 the Council of Ministers will adopt an action plan aimed at closing production in any remaining unviable pits during 2000 and preparing the viable ones for privatization.
26. We will continue our bank privatization efforts. We had three important achievements in the second half of 1999: we completed the sale of Expressbank to a high-quality strategic investor, signed the sales contract for Hebros, and issued a tender to sell Biochim, with a March 17, 2000 deadline for final bids to allow the unexpectedly large number of potential buyers to complete due diligence. We are confident that we will be able to choose a suitable buyer and sign the sales contract by end-June 2000. We are also advanced in the sale of Bulbank, the largest bank in Bulgaria. We expect to receive bids by end-April, and to sign the sales contract by end-2000. For the last remaining state bank, the State Savings Bank, we will work with the technical assistance consultant to transform it to a full commercial bank during 2000, preparing it for privatization over the medium term. As for the Central Cooperative Bank, where the state's share is just below 50 percent, we will reduce this share to below 33 percent by mid-2000.
27. Building on the major progress already made, we are fully committed to further improving the regulatory and prudential framework for the financial sector. From July 1, 2000, we will reduce the minimum reserve requirement from 11 to 8 percent. We believe this measure will improve the banks' profitability, lower interest spreads, and cushion the liquidity impact of the introduction of the single treasury account. The Bulgarian National Bank has recently taken a number of steps to strengthen banking supervision: assigning CAMELS rating to all banks in Bulgaria was completed during 1999; the monthly off-site bank monitoring system has been improved substantially, and its results have been harmonized with those obtained from on-site CAMELS rating; revised regulations have been adopted on large loans, provisions, and licensing, including elements of consolidated supervision; a comprehensive report on the state of the banking sector is now prepared quarterly; and the BNB has adopted internal rules to ensure the timely preparation of a monthly compliance report. Looking forward, we will continue to improve these monitoring systems, and will discuss with a forthcoming IMF technical assistance mission other measures to further strengthen supervision. We are also strengthening the deposit insurance fund (DIF). In November 1999, the BNB and the DIF signed a memorandum of understanding which defines the modalities of a regular data exchange that should allow the DIF to anticipate possible future needs for its funds. Also, we will submit to the Council of Ministers by end-March 2000 amendments to the law on deposit insurance to make the DIF more effective in collecting premiums and investing funds.
28. We are also taking other measures to create a well-functioning financial sector. To facilitate a recovery in private sector credit, we will make the central credit registry maintained by the BNB operational by end-March 2000, through introducing a new software system. We will also ensure that the registry covers all banks by end-June 2000. By end-March, we will submit to the Council of Ministers a new law on electronic signature which will help replace paper trail of payments with electronic trail. Moreover, we are improving the implementation of international accounting and auditing standards, and are training our judges on financial issues. As for facilitating the exit of unviable banks, we have issued tenders for the assets of a majority of the already closed banks where the Ministry of Finance was the dominant creditor. We have also designated the DIF as the agency that will administer future bank bankruptcies, and will submit a new law on bank insolvency to parliament by end-March 2000.
29. To improve the business climate and attract foreign direct investment, we are committed to taking measures to reduce red tape, corruption, and superfluous state interference in economic activity. Already in 1998-99, legislation was amended to provide for a more efficient resolution of contractual disputes. More recently, following an interministerial review of the licensing and registration regime, in October 1999 the Council of Ministers adopted a program to reduce red tape and increase transparency. A working group has recommended in January 2000 to the Council of Ministers a list of measures to facilitate the business operations of companies in Bulgaria. The recommendations of the working group include proposals for the revocation, amendment, and simplification of licenses; the introduction of common transparent rules for granting permits and licenses; the creation of streamlined systems (beginning already from end-March 2000) to facilitate the establishment and operation of businesses; and provisions for training administrative staff dealing with licenses and permits. By end-March 2000, the Council of Ministers will submit to parliament detailed proposals based on the working group's recommendations, and will adopt an agenda for implementing the recommendations over the medium term. The Foreign Investment Agency has established an annual monitoring system of administrative barriers, and the results of the first review became available in January 2000.
30. We are committed to a wide-ranging reform of public administration. Our intention is to create for the first time in Bulgaria a public service which is professional and merit-based, cost-effective, and which has a strong client orientation. At the same time we intend to accelerate our program of actions against corruption. We have already completed the first stage of this reform program. In December 1999, the functions and organizational structures of ministries were redefined, and a number of ministries were eliminated through merger (including the former Ministries of Trade and Industry which were combined into a new Ministry of Economy). As for overall budgetary employment, during 2000 staffing will be reduced by 36,500, or 6.7 percent. In addition, on July 1, 20,000-25,000 health care workers will move to the commercial sector. In the second stage of implementing our broad reform agenda we intend to take the following measures. In the first half of 2000, we will introduce a new framework for performance management in the public administration. By March 2000, we will develop a strategy to introduce more flexible pay and employment systems in the public sector. This will strengthen the professionalization of the public administration, address key areas of recruitment and retention difficulty, and provide for increased pay decompression for managerial positions in the public administration. In the next few months, we will also draft various pieces of primary and secondary legislation concerning the public administration. In this context, we will carry out further organizational and functional reviews, evaluating the possibilities for privatization of certain administrative services, and aiming for the introduction of market mechanisms in the financing, operation, and management of executive agencies. We will also seek to strengthen service delivery, and to ensure that resources continue to be allocated only to high-priority purposes. To further improve the quality of public services, we will continuously promote the professional development and training of civil servants.
31. In agriculture, we will take further steps to develop a well-functioning land market and promote the creation of a private sector rural credit market. Regarding the land market, by December 1999, restitution had reached over 96 percent, compared to 80 percent a year before. A land information system has been implemented which includes a comprehensive database to facilitate transactions on the land market. Looking forward, we expect parliament to approve the Law on Land Registration and Cadastre by end-March 2000, and this will further facilitate the tracking and registering of land titles. On rural credit, we have established a warehouse receipts system, and are currently carrying out an information campaign to explain its advantages to producers and banks. We have reduced the amount of short-term lending by the State Fund for Agriculture (SFA) from 34 million in 1999 to 30 million leva this year, while the amount of long-term lending, including loan guarantees, has been kept at last year's level of 50 million leva.
32. Recognizing the significance of high-quality data for the formulation of economic policies, we will continue to improve our statistics. In particular, we will enhance the quality of quarterly GDP through improvements in source statistics, including through improved coverage of informal activities. With respect to PPI, work will continue toward full coverage of all industrial activities by end-2001. In the balance of payments area, a closed international transactions reporting system (ITRS) is being developed. Bulgaria is a pilot country for the implementation of the General Data Dissemination System (GDDS), and is committed to use the GDDS as a framework for the development of its statistics.
33. We have continued to liberalize our trade regime with a view to improving export performance and competitiveness. During 1999, the last remaining export tax (on lumber) was removed. The Decrees for customs tariffs and trade policy measures for 2000 reduced tariff protectionbarriers and import licensing requirements in line with program commitments. As a result, from January 1, 2000, the simple average tariff rate stands at 13.7 percent, compared with 15.2 percent in 1999. We also intend to eliminate by end-June 2000 the export ban on raw tobacco through an amendment of the Tobacco Act. We will explore the scope for a further reduction in the number of tariff bands in 2001 from the present 25. Finally, we will complete the removal of all 33 state trading companies with foreign trade operations from the public sector by end-2000.
34. Prudent management of external debt will continue to be an important priority for the government. In the last six months we have developed guidelines for contracting and guaranteeing non-concessional debt, developed external vulnerability indicators which we now publish quarterly, and successfully resolved bilateral disputes with Italy and the Netherlands, with discussions with Austria being at an advanced stage. By end-March 2000 we will formulate a debt management strategy to strengthen our ability to assess external vulnerability and manage our external debt over the medium term. At the same time, we will also develop a timetable for implementing the strategy by end-2000. In this context, we will improve and expand the list of indicators used to assess vulnerability. We will continue to pursue debt service swaps for infrastructure or environment with Paris Club creditors, and other debt management operations will be undertaken only if overall liquidity is sufficient and there are adequate reserves in the fiscal reserves account. In the area of domestic debt, we will refrain from converting privatizations vouchers into government debt.
35. During the remainder of the second year of the extended arrangement, the program will be monitored based on the implementation of structural performance criteria and benchmarks (Table 1), and on quarterly and continuous quantitative performance criteria and indicative targets (Annexes I-VII). The government will conduct with the IMF the fourth review under the arrangement no later than September 2000. Other performance criteria--applicable on a continuous basis--remain as defined in the Memorandum of September 9, 1998, except for the one relating to the minimum reserve requirement which will take into account the planned reduction from July 1, 2000 (Annex VIII).